Mutual funds for your child

Rarely have we seen a time when parents were overwhelmed with so many investment options to help them plan for their children's future. It is equally true that often parents find themselves so preoccupied that they can't seem to find time to manage their own commitments, let alone plan for their children's education and marriage among other events. That is why it is important that they get some professional help. This is where mutual funds come in.

Put simply, mutual funds hire the services of a professional money manager to invest on behalf of a group of individuals. The individuals pool in their savings and leave it to the fund manager to manage their money in an optimal manner. Individuals can go about their work as usual, content in the knowledge that there is professional help at hand.

Mutual funds have much to offer to parents. Consider this - you have office work to complete, household work to do, children's homework to help with and whole lot of other social and personal commitments to take care of. In the middle of all this, where is the time to invest for your child's education or marriage or business?

Say hello to child plans/funds. We mentioned that mutual funds invest on behalf of individuals to achieve a pre-determined objective. For many investors, this objective is planning for a house, retirement, an overseas trip, parking surplus money. For parents, this objective can be 'planning for child's education or marriage or seed capital for his/her business'.

Parents must note some peculiar feature of child funds. These features tell parents exactly what makes these funds tick. It gives them a reason to consider these plans for building a corpus for their children's future.

Investment objective
The good news for parents is that there is common ground between their objectives and the objectives of child funds. Child funds are launched with the explicit objective of helping parents build a corpus. Sample this - Principal Child Benefit's investment objective reads - 'To generate regular returns and/or capital appreciation/accretion with the aim of giving lumpsum capital growth at the end of the chosen target period or otherwise to the Beneficiary (child).'

Even more explicit is UTI Children Career Plan's investment objective - 'to provide children after they attain the age of 18 years a means to receive scholarship to meet the cost of higher education and/or to help them in setting up a profession, practice or business or enabling them to set up a home or finance the cost of other social obligation.'

Asset allocation
Although most child funds take on a degree of risk by investing in stock markets, they are relatively less risky compared to diversified equity funds that can invest upto 100% of their assets in equities. They are relatively less risky because fund houses have taken adequate measures to ensure that child funds are managed conservatively.

The most important measure adopted by fund houses is to cap the equity investments at a reasonable level. Most of them have capped the equity weightage of the portfolio at varying levels, usually not exceeding 70 per cent of the net assets.

These funds have the flexibility to invest in equity and debt markets depending on the fund manager's view on these markets. These funds work like asset allocation plans allowing the fund manager to shift across asset classes so as to maximise returns for the investor.

For instance, in an equity fund, the fund manager is usually compelled to remain completely invested in equities even when stock markets appear overvalued and therefore poised for a correction. But a child fund with a cap on the equity component can always shift a portion of its assets in debt when the going gets rough.

On the same lines when equity markets are overvalued, the fund manager can shift a portion of his assets to debt so as to capture gains. When equity markets decline, he can add to the equity component. By smartly allocating assets across debt and equities, he can ensure that he enters low and exits high, the cornerstone of a successful investment strategy

Lock-in
We mentioned that fund houses make provisions to ensure that the risk associated with child funds is controlled. One way to lower the risk of equities is to make long-term investments. Over the short-term equities are the riskiest assets; over the long-term, if you tread wisely, they can generate the best risk adjusted returns for you. That is just what fund houses do; they give the fund manager the time and flexibility to make really long-term investments in the child fund. For that, they have what is commonly referred to as a lock-in period.

If you are an investor in public provident fund and National Savings Certificate then you already know what a lock-in period means. In fact, fixed deposit investors are equally aware of this term. Only difference is that child funds have an equity flavour, while NSC, PPF and FDs are debt instruments.

Reason why it makes imminent sense for equities to have a lock-in is because they demonstrate their potential over the long-term (at least 3 years in our view). When the fund manager is certain that he can invest the money for a longer period of time without being concerned about the investor standing outside his office demanding his money, he can make more prudent investments that stand a good chance of making money over the long-term.

For parents, who want to build a corpus for their children over the long-term, a lock-in must be seen as an ally for two reasons. One, it enables the fund manager to make investments that are in the investor's long-term interests. Second, it acts as a deterrent for the parent from making premature withdrawals.

As parents will appreciate, child funds have a lot of features working for them. Even if some of these features appear restrictive in nature (cap on equity investments, lock-in period) remember over the long-term they work to the parent's benefit. They instill discipline and have the potential to generate a corpus for the child, and in the final analysis that is all that matters.

SBI Magnum Taxgain Scheme 1993: Efficiently managing market crashes

Magnum Taxgain has emerged as the prodigious son of the ELSS category — one that every investor would be extremely proud of owning. It has been ranked number one for three consecutive years from 2004 to 2006.

And along the way the fund has matured. Of late it has shown an ability to efficiently manage market crashes. In the June 2006 quarter, the fund lost just 11 per cent compared with the category’s loss of 15.35 per cent and again in the March 2007 quarter, it lost 4.06 per cent compared to the 6.45 drop in the category.

Since January this year the fund has been consciously reducing its exposure to technology and construction stocks. The exposure to construction has come down to 7.68 per cent in June 2007 from an earlier high of 16 per cent in December 2006.

Similarly, the allocation to tech is also down to 14.17 per cent in June from 18.5 per cent

ULIPs Vs Mutual Funds - the battle ends

The long-standing debate over the suitability of Unit Linked Insurance Plan (ULIP) and mutual funds is set to come to an end as the recent announcements by the IRDA, clearly demarcates the playing fields. The insurance industry is buoyant as it views the new guidelines as an endorsement of the fact that ULIPs as an investment tool has become important enough for the regulators to sit up and take notice and the industry players are unanimous in their opinion that the growth of the overall industry in the future will be led by ULIPs.

As per IRDA's new guidelines, which came into effect on July 1, there has to be a minimum lock-in period of three years for ULIPs, a minimum term of atleast five years and the death benefit payable or sum assured under the single-premium product has to be at least 125 per cent of the single premium paid, among other major policy changes. The new guidelines will stop ULIPs being positioned as short term investments products, and they will look less like mutual funds and more like insurance policies. The new move is expected to derail the robust growth of ULIPs in the country somewhat which till now have banked on their flexible investment mandate to lure investors.

New ULIPs now come with a minimum term value of five years, whereas in mutual fund’s ELSS there is a lock-in period of just three years. If an investor decides to withdraw money from ULIP after three years, the amount depends on the surrender value given by the respective insurance company. Ideally ULIPs are considered for those classes of investors who want to put money in a investment product that earns them decent returns by further investing the money in the market, and at the same time ensure a life cover and tax efficiency.
As per the new guidelines, no loans can be granted under ULIP schemes. Further, insurance advisors who sell ULIPs have to be given separate training before they are authorised to sell them. Also, advertisements have to clearly bring out the fact that ULIPs are different from traditional insurance products.

In the wake of the new guidelines insurance companies are busy re-positioning ULIPs and the message is not to view these products as short-term investments to reap windfalls from market fluctuations. The guidelines therefore are unlikely to dampen the growth for companies that are already focussing on products with a medium to long-term cover, though the guidelines surely take away some flexibility from a customer. The new guidelines are intended to enhance transparency levels and provide better understanding of the product to prospective investors, and if applied in principle, ULIPs will remain as attractive as they were earlier.
However, the new guidelines by the IRDA which allows insurance companies to accept new policies, fund switches, withdrawals and surrender requests upto 4.15 p.m, well after the market closes, has sparked a controversy. It has thrown the insurance product to potential misuse. What this translates into is that an investor can switch from liquid fund to an equity fund at the end of the market hours, with the complete knowledge of how the markets have transpired during the day and gain any arbitrage opportunity thereof. ULIP have long been considered insurance industry’s answer to mutual funds, and were the only weapon which insurance companies had to ward off the threat posed by AMCs. Now, there has been always a parallel comparison of unit linked insurance products and mutual funds, but new guidelines allows transactions till 4.15 p.m, mutual funds companies have to shut shop a good half an hour before the market closes to control any misuse.

Mutual funds are essentially short to medium term products. The liquidity that these products offer is valuable for investors. ULIPs, in contrast, are now positioned as long-term products and going ahead, there will be separate playing fields for ULIPS and MFs, with the product differentiation between them becoming more pronounced. ULIPs now do not seek to replace mutual funds, they offer protection against the risk of dying too early, and also help people save for retirement. Insurance has to be an integral part of one's wealth management portfolio. Further, exposure of Indian households to capital markets is limited. ULIPs and mutual funds are, therefore, not likely to cannibalise each other in the long run. While ULIPs as an investment avenue is closest to mutual funds in terms of their functioning and structure, the first and foremost purpose of insurance is and will always be 'protection'. The value that it provides cannot be downplayed or underestimated. As an instrument of protection, insurance provides benefits that no investment can offer. It is important for an investor to understand his financial goals and horizon of investment in order to make an informed investment decision. The decision to invest in either a mutual fund or a ULIP should depend on the time period of investment, individual financial goals as well as risk taking appetite, and it’s about time the industry and customer realise it.

Ideal Asset Allocation through the Midcap route - top mutual funds

The path to create wealth over the long term in the world of mutual funds is through the equity-oriented funds route - is a fact we all accept and acknowledge, but in these volatile times, asset allocation have assumed a bigger role than ever. Investment advisors and expert financial planners are busy chalking the right asset allocation model based on the investor’s age and his risk appetite to suit his overall financial planning and help him in realizing his investment objectives.

Mutual funds as a preferred investment vehicle for financial planning have gained ground pretty fast. The paradigm shift in Indian psyche from viewing mutual funds as pure returns instruments to products which can blend with their individual investment style is amazing, and is a tribute to the superior product innovation and tireless efforts of the industry as a whole.

Coming back to the subject of asset allocation, a major question which an investor faces after he has zeroed in on the amount of equity exposure, is the allocation between Large, Mid and Small cap funds.

There are a total of 168 equity-oriented schemes in the country now and approximately twenty schemes which are either dedicated to investing in midcap or large cap stocks or have a flexi/multi cap mandate. The chief reason behind the AMCs launching so many market cap-based schemes is the realization of the fact that these schemes are now looked upon as a separate category, and as the world of investing in India gets more sophisticated, these schemes will realize even more attention.

If we look at the performance of the entire equity-oriented schemes in the last one year period a midcap scheme – Sundaram Select Midcap is dominating the rankings, in an era when the general perception is that large caps have outperformed the midcap in the recent times. For example, Sensex returns for the last one year period is 46.2% and in the same time, BSE Midcap has appreciated by only 19.07%. Even in the long run, Reliance Growth which is a midcap oriented scheme is dominating the ranking in the five-year return category.

Large cap stocks typically signify stability of returns and less volatility as there is a clear earnings visibility, strong business model and long term performance record. For investors in these bluechip stocks there are plenty of advantages like liquidity and ready availability of company’s financial and other related information which makes it a little easier to track the company, these stocks generally have a large number of analysts tracking them; therefore any downward deviation comes with a lot of advance warnings, giving investors the requisite time to liquidate their holdings. Comparatively, Midcaps are less liquid and more volatile but they are still favoured by the investors, because they compensate the above handicaps by offering higher returns.

In Emerging markets and specifically in countries like India, where the markets are just coming of age, there are plenty of opportunities in the Midcap space, which is due to the fact that a booming economy gives birth to and sustains new ideas and businesses all around, and companies with the right mix of business model and people have the potential to become, as they say, large cap of tomorrow.

India is home to some of the finest technology, has become an outsourcing hub on the back of skilled and cheap labour, its management quality is fast being recognized as world class, and globalization which was initially looked upon as a threat has now been converted into an opportunity, the above factors combined with the favourable demographics of Indian population, political stability has lead to an environment which is very conducive for trade and business to flourish.

Presently, Midcaps find a place in the overall portfolio of the investors “just to spice up the returns” and even for the most aggressive of the fund investors, it may mean a 10-15% higher allocation than normal. Not surprisingly, the combined fund size of the capitalisation-oriented funds is only around 20% of the total corpus managed by equity diversified schemes.

In view of the above arguments, investors – even the most conservative of the lot, who have decided to allocate a certain portion of his hard earned money into equities, must not kill his portfolio by allocating a larger share of the pie to large cap stocks than is necessarily required and must get invested in the Indian midcap space, where the growth rate is not just phenomenal but looks sustainable as well.

How to build your Mutual Fund portfolio?

Great salaries, excellent bonuses, fairly valued markets, high interest rates -- the time looks just perfect to design and put together your mutual fund portfolio.

Building a MF portfolio is akin to building and furnishing your own home:

a) It depends on your financial capacity

b) Your personal tastes and preferences

c) Requires a lot of patience and care

Therefore, while there cannot be a model portfolio suiting everyone's needs and objectives, you can follow a few general rules to build yourself one.

Be clear of what you want

To begin with, you must decide what your financial objectives are; and how much risk you are willing to take to achieve those objectives.

The goals should be as precise as possible. For example, you goals could be:

• Rs 50,000 to pay-off the personal loan in 2007
• Rs 2 lakh (Rs 200,000) for children's higher education in 2012
• Rs 1 lakh (Rs 100,000) for foreign trip in 2010
• Rs 7.5 lakh (Rs 750,000) for daughter's marriage in 2015
• Rs 1 crore (Rs 10 million) retirement corpus in 2020

Second, your goals must be realistic. They must be in line with your financial position and risk appetite. No point in having too ambitious or too pessimistic goals; or having goals, which require you to take undue risks.

Devote proper time and thought to planning your goals.

Done? Good, that's a major part of your job over. Once you know where you stand and where you want to go, the rest is just a matter of details.

Match each goal with the appropriate MF category

Equity markets are too volatile in the short-term, but can give good returns in the long run. Debt funds, on the other hand, give steady but low returns. Therefore, select the goals, which you will finance through equity funds and through debt funds.

Assuming your retirement is still 15 years away, a predominantly equity portfolio may be a better option.

But for your personal loan, which is payable just one year hence, debt funds will be more suitable.

And for the medium term, like your foreign trip, balanced funds may be the right answer.

Liquid funds are a nice way to park your very short-term funds.

Don't be too concentrated or over-diversify

Depending on the corpus, one could invest in an average of 4-7 funds for an equity portfolio and maybe 3-4 funds for the debt and balanced category. Too less a number of funds make your portfolio concentrated and risky. Too many, makes it unmanageable and doesn't really serve the purpose. You need to strike the right balance.

Also, while selecting the fund, study their portfolio mix and ensure that they are different. If most of them are same, then even with 6-7 funds you won't get the desired diversification.

In order to achieve diversification across asset classes, one could now look at some of the forthcoming options such as real estate fund, gold fund, international fund, etc.

Build a suitable mix of equity funds

Apart from allocating your corpus in different asset classes, you need to do some allocation within the equity class. Index/Large Cap funds, Mid-cap/Small cap funds and Sector Funds are the 3 broad sub-categories in which you have to divide your corpus.

Index and Large Cap funds will deliver steady returns, which will be in line with the market performance. In the equity space, they carry lesser risk as compared to mid caps, small caps etc. About 70-80% of your corpus could be allocated to this category. They provide stability to your portfolio. Go for funds with moderate risk and consistent performance.

Your portfolio may need some kicker too. Mid-cap/Small cap funds and Sectors Funds have the potential to provide higher growth (of course with a higher risk). Be prepared for a bumpy ride; and sometimes crash landing too. A 10-20% allocation to this category may be okay. In case of a bad performance, major portion of your corpus is still relatively safe. Large caps will minimise your losses and will also bounce back quickly.

Don't forget the tax aspect

Neglecting to pay tax is bad, but tax planning is not. It can help you to minimize your tax outgo, legally.

Therefore, take care to choose the right option -- dividend payout, dividend reinvestment or growth. They may help you to save unnecessary taxes.

Make sure that you use the post-tax returns in your calculations. Else you may miss your target.

Having built a suitable portfolio, you need to nurture it. You have to regularly feed it with additional investments. You will have to remove the weeds (poor performing funds) periodically. And be patient. It takes time for the tree to grow. But once is has grown, it becomes strong -- so you don't have to take too much care; and fruitful -- it will give you returns year after year.

Sensex @ 15K: How to get the best from Mutual funds now

Sensex touched a new all time high today. The stock market has had a remarkable run since touching its low of 8900 in June 2006.

Needless to say, the last one-year or so has been quite eventful for investors in equity funds. If one were to analyze the behavior of investors during different phases of the stock market, there are lessons to be learnt for existing investors as well as for those who intend to make equity funds an integral part of their portfolio.

Market Ups & Downs

Every time the market goes up, many investors start wondering whether this is the right time to exit. In fact, there are investors who make the mistake of exiting too soon. It is important to remember that equities are a long-term investment vehicle and one needs to give one's money enough time in the market to get the best results. Remember, if one takes a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early thus missing out on potential gains.

Similarly, whenever the market turns volatile, it causes anxiety and in some cases, even sleepless nights. In times like these many investors abandon a carefully designed investment strategy as a knee jerk reaction and pay the price for it. Obviously, it is not be a smart thing to do. The key is to recognize that volatility exists in the market place and will remain so. After all, volatility is a statistical measure of the tendency of the markets to rise and fall. While volatility can be described as a natural phenomenon, there is a need for investors to develop ways to deal with it.

Invest Regularly

Though a lot has been written about systematic investing, it is often perceived as an option only for small investors. The fact of the matter is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows investors to invest in the stock market at different levels without having to worry about the market levels and the market movements in the short-term. Remember. When you opt for regular investing, you abandon any strategy that might control timing of your investments. In other words, you continue to invest irrespective of market conditions. This strategy works very well partly because of "averaging" and partly because in the long run markets move upwards, in spite of short-term falls.

It is not to say that one should not invest a lump sum amount in equity funds. For a long-term investors, making a lump sum investment is not an issue, however, a lump sum investment should not be the end of the story. Instead, it should be taken as a beginning of an investment programme to build wealth over time and needs to be followed by regular investments as and when investible surplus is available. Either which way, the key to successful equity investing is making investments on a regular basis.

Don't try to time the Markets

One often comes across investors who wait for months in anticipation of a correction in the markets. However, more often than not, they end up investing in a panic as the markets scale newer heights. At times, a small correction in the market seems like a great opportunity to them and as result they end up investing at much higher levels compared to the level prevalent at the time when they had originally planned to invest.

I am sure there are many investors who must be wondering whether they should be investing in the markets at the current levels or not. Though, the prospects of the markets look promising from the long-term point of view, it may be prudent for a new investor to adopt a strategy whereby a part is invested as a lump sum and the balance by way of systematic investing. The exact proportion of the lump sum and systematic investment would depend on one's risk profile and time horizon. This way, if the market drops right away, one would suffer a smaller loss and can buy more units each month at the lower prices.

Take help of a professional to determine the right levels for you. However, there are many investors who do not find regular investing very exciting. They also find the whole process a little cumbersome. It is important for investors to realize that investing in equity funds is not about excitement but a sensible way to build wealth through healthy real rate of returns. However, the key is to concentrate on selection and maintaining the disciplined way of investing.

It is often said that 90% of the investment success depends on the quality of the portfolio and the right mix of funds investing in different market caps and the remaining 10% on timing the investments. In reality, many investors spend 90% of their time "timing" their investments.

Now, a few words on the selection process. It is important to select the funds after careful deliberations especially keeping your risk profile, time horizon and investment objectives in mind. You will find some brokers constantly approaching you with new products. You need to learn to say "No" to products you don't really want or need. In other words, be wary of "buy now while the stocks last" sales pitch and always keep your long- term investment objectives in mind while building your portfolio.